Price pressures add to headwinds, weigh on retail

The economic headwinds appear to be gaining strength with price inflation edging higher through early 2018 as measured by the Consumer Price Index.

The brunt of the headwinds likely will be felt by the (retail) goods sector of the economy, where flat or falling prices leave the retail sector most vulnerable to threats to demand for consumer goods.

Weak pricing is among the reasons the retail goods sector is finding it difficult—especially among brick and mortar retailers—to sustain the healthy sales gains evident through the holiday (more here).

Here is more on what the latest numbers on consumer prices say about:

Topline inflation. Core consumer price inflation (i.e., excluding food and fuel) topped 2% in March, following the lead that overall CPI inflation set in prior months.

CPI vs. PCE inflation. Inflation above 2% will give the Federal Reserve reason to continue to raise interest rates—which will add to the economic headwinds. It’s important to remember, however, that the Fed’s primary price gauge is PCE inflation, which is running slightly weaker than CPI inflation.

The Fed impact. Despite the mixed inflation metrics, expect the Federal Reserve to remain intent on raising interest rates—in large part to unwind the intervention (i.e., quantitative easing) it undertook during the last recession.

Goods as an exception. Parsing inflation in its major parts shows why the (retail) goods sector is an exception to rising inflation pressure. Goods prices continue to decline year-to-year—while inflation remains focused in services and a growing threat primarily in food and energy.

Goods by category. The deflation threat remains most pronounced in electronics and home furnishings (-1.5%) while prices are roughly flat or falling in apparel and autos. Prescription drugs remain the rare goods category registering significant price increases.

The food & fuel threat. The inflation threat is most evident in the turnaround in food prices, which are now rising after eclipsing -2% price declines in late 2016. Meanwhile, energy prices continue to climb year-to-year (+7.0%) at strong rates.

Service categories. Price inflation remains elevated in service categories overall, but is especially challenging in key categories. For example, rent and house payments continue to lead month-to-month price gains—resulting in sustained year-to-year price inflation above 3%.

These results are based on MacroSavvy’s analysis of latest Consumer Price Index data from the Bureau of Labor Statistics.